Terrific New Stuff From Sprott

Please take the time to read through this piece from Sprott Asset Management. You should consider printing it and/or forwarding it, too. Succinctly stated, this presentation is readily comprehensible and extremely powerful.

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Weakness Begets More Weakness
How does the US achieve a sustained recovery if “the 99%” continues to suffer perpetual decline in real income?

By: Eric Sprott & David Baker

Other than some obligatory arrests for disorderly conduct, the Occupy Wall Street movement celebrated its one year anniversary this past September with little fanfare. While the movement seems to have lost momentum, at least temporarily, it did succeed in showcasing the growing sense of unease felt among a large segment of the US population – a group the Occupy movement shrewdly referred to as “the 99%”. The 99% means different things to different people, but to us, the 99% represents the US consumer. It represents the majority of Americans who are neither wealthy nor impoverished and whose spending power makes up approximately 71% of the US economy. It is the purchasing power of this massive, amorphous group that drives the US economy forward. The problem, however, is that four years into a so-called recovery, this group is still being financially squeezed from every possible angle, making it very difficult for them to maintain their standard of living, let alone increase their levels of consumption.

One of the central themes that arose out of the Occupy movement was the growing sense of unease among the average American citizen with regard to growing imbalances in wealth within the US. The rich are getting richer while the poor get poorer. That feeling is entirely legitimate. According to the US Census Bureau, in 2011 the median income of US households, adjusted for inflation, fell to $50,054. This is 4.9% below its 2009 level, and 8.9% below its all-time peak of $54,932 in 1999. This is not encouraging data. It implies that the average American household is almost 9% poorer today than it was thirteen years ago.

Figure 2 below is courtesy of Shadow Government Statistics, and shows US Average Weekly Earnings adjusted for inflation using two versions of inflation measurement. It is a sobering chart. The blue line shows inflation-adjusted earnings using government CPI, and shows a small but steady increase in real earnings since the mid-1990s. The green line, however, shows what inflation adjusted earnings would be today had the US Bureau of Labour Statistics not made changes to the CPI in the early 90s, and reveals that average weekly earnings have actually been in contraction for over 17 years. Forget blaming our current woes on the hangover from 2008-2009. The average American worker has been losing income in real terms since the late 1990s. This is clearly a long-term trend which has compounded itself over the last ten years. Weakness begets more weakness.

Meanwhile, as the Occupy movement also repeatedly highlighted, the increase in wealth inequality within the US has grown steadily over the past thirteen years. Figure 3 below shows the “Gini Ratio” of US household income, which statistically captures income inequality within the country. A Gini Ratio coefficient of 0 corresponds with perfect equality, while a coefficient of 1 describes a situation where one person has all the income, and everyone else has nothing. As can be seen, a clear trend towards inequality has been in place since the late 1960s, and that trend appears to be accelerating today. Just as weakness begets weakness, strength begets strength for those with the most wealth.

FIGURE 3 : INCOME GINI RATIO FOR US HOUSEHOLDS

Source: US Department of Commerce: Census Bureau

These two central tenets of the Occupy movement – that the rich are getting richer while the poor are getting poorer, are the same tenets that are hindering a real recovery within the US. We simply cannot expect the US economy to grow if the 99% are not generating more wealth and disposable income over time. Any discussion of a US recovery that doesn’t acknowledge the deteriorating reality of this group is not an honest discussion in our opinion. And it’s only getting worse. On top of consistently losing purchasing power to inflation over the past decade, the 99% is faced with a pronounced deterioration in job quality (in terms of average salary), chronic youth underemployment, an inability of retirees to generate income from savings, and a steady increase in outright poverty. Market pundits can get excited about a 1.1% increase in September retail sales, but they can’t expect that increase to be sustainable unless we see some relief for the core consumptive engine that ultimately drives those sales.

In this vein, it was very interesting to watch the reaction to the most recent US Bureau of Labor Statistics (BLS) unemployment release on October 4, 2012, which optimistically reported US unemployment falling to 7.8% – representing the lowest level of unemployment since January 2009. Rather than elicit jubilation, the report prompted cynicism, most notably from the former General Electric CEO, Jack Welch, who famously tweeted, “Unbelievable jobs numbers… these Chicago guys will do anything… can’t debate so change numbers,” immediately after the release. Welch’s tweet elicited a torrent of defensive responses, most notably by the BLS who were outraged that anyone would question their methodology. But it’s not the methodology that should cause concern (it is just a survey, after all, although continually lowering the “participation rate” of the US labour force does deserve some eye-rolling), it’s the fact that the jobs numbers are shrouding the painful reality of the post-2008 US labour market: that the jobs lost tend to be higher-paying, while the jobs gained tend to be lower-paying.

It doesn’t take much to see this trend evolving. A cursory review of the most recent layoff announcements makes it fairly clear what type of workers are being laid off in 2012:

“Bank of America slashing 16,000 jobs before December”

“Pharmaceutical giant Merck to cut nearly 12,000 jobs”

“Computer giant Hewlett Packard to slash 27,000 jobs by October 2014”

“AMD Announces 15% Cut in Workforce”

Meanwhile, the new jobs allegedly responsible for lowering the unemployment rate tend to be coming from companies seeking part-time workers, like Amazon.com, which announced that it will be hiring 50,000 part-time workers for the holiday season. This is also reflected in the latest BLS report, which accounted for 582,000 of the reported 873,000 new jobs gained in September as “part-time for economic reasons”. The reality is that were it not for those part-time jobs gains, US unemployment would look dismal. Public hiring announcements by US companies have totaled a mere 84,937 workers for the first eight months of 2012, which is significantly lower than the 224,243 workers that were announced for the same period in 2011. The BLS labour surveys don’t account for the difference between a Bank of America job cut vs. an Amazon.com hire, but that’s the difference that has the biggest impact on the disposable income netted by the job loss/gain.

The trend of high-salary job losses offset by low-salary job gains is increasingly evident among the youngest participants of the 99% – recent college graduates. Figures analyzed by Northeastern University’s Center for Labour Market studies stated that, in 2011, approximately 53.6% of bachelor’s degree-holders under the age of 25 were either jobless or working in positions that didn’t require a college education, representing the highest percentage in at least 11 years. The data cited in the study implies that at least one out of four recent college graduates was completely out of work last year. This trend is unlikely to change anytime soon. According to government projections, “only three of the 30 occupations with the largest projected number of job openings by 2020 will require a bachelor’s degree or higher to fill the position – teachers, college professors and accountants. Most job openings are in professions such as retail sales, fast food and truck driving, jobs which aren’t easily replaced by computers.” With two thirds of the national college class of 2011 burdened with an average student loan debt of $26,600, the US economy will not be able to count on this demographic to generate increased spending in the years to come. If anything, most of these recent college grads are essentially an economic write-off until the US labour market improves.

This trend of lower pay is also starting to show in post-graduate professions. According to statistics from the National Association for Law Placement (NALP), of law graduates in 2011 whose employment status was known, only 65.4% obtained a job for which bar passage was required.15 NALP writes, “Moreover, with about 8% of these jobs reported as part-time, the percentage employed in a full-time job requiring bar passage is even lower, 60%.” Figure 4 shows the decrease in average law salaries since 2009, with the most striking decline evident in the median salary at law firms, which has fallen 35% over the past three years as law firms shift to more lower paying jobs.

FIGURE 4: STARTING SALARIES: CLASSES OF 2009, 2010, AND 2011

Source: Source: National Association for Law Placement, Inc.

Think of the difference in disposable income between a salary of $130,000 in 2009 vs. $85,000 in 2011. That’s the difference that isn’t being expressed in today’s labour statistics, but has a profound impact on consumer spending.

Then there are the retirees, and while they may not yet identify themselves with the Occupy movement, they do undeniably make up a key component of the 99%. This is a group that has not only faced continual inflation erosion, particularly due to massive increases in healthcare costs (see Figure 5), but also now faces the burden of generating retirement income in a perpetual zero percent interest rate environment. If there is any group that has felt the decline in living standards over the past decade it is this one. Consider, for example, that in 2012 a savings of $1 million dollars invested in a generic 10-year Treasury bond currently pays a mere $17,000 in interest before taxes. And that’s $17,000 in 2012 dollars. In comparison, $1 million invested in 10-Year Treasuries in 1999 would have generated $47,200 before tax in 1999 dollars, when a gallon of gas was $1.22 and the cost of almost every household item was lower by half. There is no statistic that measures the impact of this decline on the disposable income for retirees, but it doesn’t take much imagination to realize that it has completely changed the prospects for an entire generation of savers.

FIGURE 5: HEALTH CARE COSTS EXPLODING

Source: US Department of Labor: Bureau of Labor Statistics

Then there are the millions of Americans who haven’t saved enough: According to the Transamerica Center for Retirement Studies, an estimated 54% of workers in their 60’s do not have enough financial wealth to sustain themselves in their retirement. According to the Employee Benefit Research Institute, 60% of all workers in the US have less than $25,000 of savings and investments. That’s less than $25,000 in an investment environment that only pays 1.7% on 10-year Treasury bonds. If they don’t have enough saved for retirement today, how can we expect them to spend more tomorrow? Couple this with the 46 million Americans who are now enrolled in the federal welfare food stamps program, (more than double the amount from a decade earlier), and it paints an extremely bleak picture. But this is the reality of the 99%. This is the reality affecting the class of consumers that is expected to drive the US out of recession.

When Ben Bernanke announced QE3 in September, he discussed the importance of increasing the US consumer’s willingness to spend: “The issue here is whether or not improving asset prices generally will make people more willing to spend… If people feel that their financial situation is better because their 401(k) looks better for whatever reason, or their house is worth more, they are more willing to go out and provide the demand.” The 99% will not spend more unless the trend in declining real incomes can be reversed. The current antidote of quantitative easing has indeed helped the equity market and lowered the costs of mortgages. But on the flipside, it has driven the prices of food and energy far beyond the rate of inflation, destroyed retirees’ savings through zero percent interest rates, and ultimately done nothing to boost the confidence and investment required to reverse the persistent labour trend towards lower paying jobs.

The sad fact is that the economic reality for the average family is far worse today than it was ten years ago… even fifteen years ago, and the trend of declining wealth is firmly in place. The youth need higher paying jobs and the retirees need yield, and for all the trillions of dollars that the US government and other western governments have spent and printed, none of it has addressed these key areas of weakness in a way that can reverse the long-term trend. As we approach year-end and the finality of the US election, there will likely be numerous indicators implying a US recovery. Unless they directly benefit the 99%, we would advise readers to take them with a large, bipartisan grain of salt. Weakness begets weakness, until something dramatic reverses the trend’s course. The 99% are firmly stuck in a declining trend, and we do not see it reversing any time soon.

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"If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children wake up homeless on the continent their Fathers conquered...I believe that banking institutions are more dangerous to our liberties than standing armies... The issuing power should be taken from the banks and restored to the people, to whom it properly belongs."

Yamana Gold reports record 3Q GEO production but costs, taxes weigh

Yamana Gold reported record production of 310,490 gold equivalent ounces during the third quarter, as the company's adjusted earnings slightly exceeded analysts' expectations.

However, co-product cash costs increased from $468 per ounce to $531 per GEO during the quarter

Net earnings for the third quarter of this year were $60 million or 8-cents per share, compared to net earnings of $116 million or 16-cents per share for the third-quarter 2011. "Net earnings for the third quarter of 2012 were impacted by an increase in the Chilean tax rate, enacted in late September which affects the tax rates on both current and deferred income taxes," said Yamana.

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Again.... CASH COSTS are bogus. In Coeur de Alene's Q2 2012 report this is what they stated about cash costs:

Ain't that something else. You mean all of these ACTUAL COSTS come from revenues made out of THIN AIR? Furthermore, where is CAPEX spending figured in the costs? I guess the shareholders get to hold the bag.

Anyhow, I am having an interesting email exchange with the retired geologist "RHODY", who stated that the break-even marginal price for silver was now $29 an ounce.

Sprott talked about the retirees that are really being hit hard. The truth is, if TF's thesis is correct, i.e. we are at the end of the great Keynesian experiment, it won't matter whether you saved fiat or not, and it won't matter what is your demographic. The end result will be that whatever fiat you hold or whatever are your assets denominated in fiat, they will all be worthless, because the currency will be worthless, and health care, food, water, and fuel will not be available from the collapsed system. So, Sprott is correct, but in the long run, his observations are largely irrelevant unless one uses them to protect himself with preps and PMs, because the whole system is going to collapse and leave the country looking like Lower Manhattan last night. The cartel apparently is going to try to sit on the fiat price of PMs until the supply is exhausted, as Draghi said, "whatever it takes", even if they have to wipe out NYC with a manufactured hurricane in order to do it.

Yesterdays GSR was not reported officially ( the one I use) , but if looked at in Netdania, it went up again as expected as silver lost in price. Did not quite reach 54 , but highest intraday reading was like 53, 8- 53, 9, so I guess its sufficiently close.

Looks like it will stabilize and turn around, so I again opened long position of XAG USD at 31,83. Anyway, there is not much downside left as time brings with each day the exponential channel support (= proportional to the USG debt) higher. Right now it stands around 32, it can break down to 31-30 in some bad situation ( liquidity crunch?) , but that's it.

There has been 3 down days, quite similar to the exits from summer lows ( On July 25, Aug 3, Aug 16) ,so...

I have a meeting tomorrow with a representative from Sprott Asset Management.

If any Turdites have questions about his most recent article that Turd posted, PM me. I can't guarantee that I will be able to ask your question, but any I do get a chance to ask, I will post their answers shortly after as time allows.

"The truth is, if TF's thesis is correct, i.e. we are at the end of the great Keynesian experiment, it won't matter whether you saved fiat or not, and it won't matter what is your demographic. The end result will be that whatever fiat you hold or whatever are your assets denominated in fiat, they will all be worthless, because the currency will be worthless, and health care, food, water, and fuel will not be available from the collapsed system."

I agree. The yield on a 10 year note or 30 year bond, after the bond market implodes, is zero anyway. Either a hyperinflationary depression or a complete destruction of the current system will give a similar result. Unless, the PTB decide to close the banks, and create a new monetary system sometime soon before reopening them. With a PM aspect to the new system to provide an anchor that is now missing.

Sprott spells it out very nicely, thanks Turd for reposting it. But what I want to know is when are the 401k's and IRA's going to get repo'd and turned into good 'ole freedom annuities? Because who would turn down guaranteed 8% annualized return? /sarc

edit: the more I think about it, what is there something like $3 trillion in 401k/IRA funds? That would extend the life of the gov another 2 years maybe.

Oct. 30 (Bloomberg) -- Spain’s bad bank will buy foreclosed assets at an average discount of 63 percent as the state seeks investors to become shareholders in the 60 billion-euro ($77 billion) facility, the nation’s bank-rescue fund said.

The bad bank, known as SAREB, will apply an average discount of 46 percent to gross book value on loans to developers, the FROB rescue fund said in a presentation yesterday in Madrid. Nationalized lenders will transfer 45 billion euros of assets to the bad bank, while other lenders with capital shortfalls may transfer about 15 billion euros, FROB Chairman Fernando Restoy said, adding that the transfer values shouldn’t be a “reference” for the property held on the books of the rest of the banking industry .

Spain is setting up the bad bank, a mechanism also used in Ireland, to help lenders that receive state aid sell real estate that has plunged in value. The creation of the vehicle is a condition of a European bailout of as much as 100 billion euros for Spain’s banking industry agreed to in July....

Al Gore in 2001 was roughly worth $2 million. A millionaire but barely so. Heck my dentist probably has that kind of money. Al Gore in 2012, and after $2.5 billion in stimulus went to companies he’s invested in, is a bit wealthier. $98 million wealthier.

...

Fourteen green-tech firms in which Gore invested received or directly benefited from more than $2.5 billion in loans, grants and tax breaks, part of President Obama’s historic push to seed a U.S. renewable-energy industry with public money.

I think most of us here are already aware of these facts. His analysis is absolutely correct. But, for it to be effective to enlighten others to the situation, there needs to be some solutions offered. When all you are left with is:

The 99% are firmly stuck in a declining trend, and we do not see it reversing any time soon.

People will just shut it out. Why bother even worrying about it if there is nothing you can do? Not where I am coming from, but how most of the people I know would react.

Maybe I am just weary from reading too much and watching too many webcasts about the impending doom.

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